Latest COVID-19 Relief Package

On Monday, The U.S Senate and House of Representatives passed a $900 billion COVID-19 relief bill that provides $600 in stimulus payments to individuals, adds $300 to extended weekly unemployment benefits, and provides more than $300 billion in aid for small businesses. The legislation also ensures tax deductibility for business expenses paid with forgiven Paycheck Protection Program (PPP) loans.

Highlights of the bill:

Stimulus Payments

$166 billion for economic impact payments of $600 for individuals making up to $75,000 per year and $1,200 for married couples making up to $150,000 per year, as well as a $600 payment for each dependent child under the age of 17(no payment is available for an adult dependent). The checks will be cut in the coming weeks and will be based on 2019 filing information.  But as was the case with the first round of stimulus checks, the payments represent an ADVANCE against a credit taxpayers will claim on their 2020 tax return. And once again, if the ACTUAL credit a taxpayer is owed on his or her 2020 return exceeds the ADVANCE payment received, they will claim an additional refundable credit for the balance. To the contrary, if the ADVANCE payment exceeds the ACTUAL credit, the taxpayer is not required to “true-up” by making a payment back to the IRS.

Changes to the PPP program

1.       Tax deductibility of PPP expenses

Since the publications of Notice 2020-32, borrowers and tax professionals alike have put their faith in Congress to overrule the Service and provide a double benefit : tax- free forgiveness of loan proceeds AND deductible expenses paid with PPP funds. Section 276 of Division N of the latest bill does that, by providing that ‘no deduction shall be denied or reduced, no tax attribute shall be reduced, and no basis increase shall be denied, by reason of the exclusion from gross income,’’

This rule applies to ALL borrowers, even those who have already applied for forgiveness. Thus expenses paid with PPP funds are now completely deductible.

2.       New Expenses Eligible for Use/Forgiveness

The bill gives PPP borrowers who have not yet applied for forgiveness the opportunity to spend proceeds on four new types of expenses. Those costs are also eligible for forgiveness subject to limitation (These are all non payroll costs and the sum of non payroll costs cannot exceed 40% of the TOTAL costs eligible for forgiveness).

·       Covered operations expenditures – Payments for any business software or cloud computing service that facilitates business operations, product or service delivery, the processing, payment, or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses.

·       Covered property damage costs : Costs related to property damage or vandalism due to public disturbances that occurred during 2020 that was not covered by insurance

·       Covered supplier cost: Expenditures to suppliers that are essential at the time of purchase to the recipient’s current operations.

·        Covered worker protection :These are operating or capital expenditures that are required to facilitate the adaptation of the business activities of an entity to comply with COVID-19 federal health and safety guidelines. Eligible costs are those related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19. 

3.       New options for covered periods

A borrower is no longer locked into an 8 or 24 week period, instead, they can choose any period lasting between 8 and 24 weeks as well.

4.       Streamlined forgiveness for borrowers under $150,000

Borrowers with loans less than $150,000 will only be required to submit a one -page online or paper form and will only be subject to audit if they commit fraud or use the proceeds for improper purposes.

Second Round of PPP loans

The bill creates a SECOND round of loans for those who have already borrowed and fully extinguished their original PPP proceeds. For these borrowers, the loan is generally determined by multiplying the average monthly payroll for 2019 by 2.5. The maximum loan amount has been cut from $10 million in the first round to $2 million maximum. In addition, hard hit businesses in the hospitality industry- bars, restaurants and hotels will be permitted to borrow 3.5 times average monthly payroll, limited to $2million.

Eligibility for a second round of borrowing is much more stricter than before. Who is eligible to apply?

PPP2 loans will be available to first-time qualified borrowers and, for the first time, to businesses that previously received a PPP loan. Specifically, previous PPP recipients may apply for another loan of up to $2 million, provided they:

• Have 300 or fewer employees.

• Have used or will use the full amount of their first PPP loan.

• Can show a 25% gross revenue decline in any 2020 quarter compared with the same quarter in 2019.

PPP2 also makes the forgivable loans available to Sec. 501(c)(6) business leagues, such as chambers of commerce, visitors’ bureaus, etc., and “destination marketing organizations” (as defined in the act), provided they have 300 or fewer employees and do not receive more than 15% of receipts from lobbying. The lobbying activities must comprise no more than 15% of the organization’s total activities and have cost no more than $1 million during the most recent tax year that ended prior to Feb. 15, 2020.  

PPP2 will also permit first-time borrowers from the following groups:

• Businesses with 500 or fewer employees that are eligible for other SBA 7(a) loans.

• Sole proprietors, independent contractors, and eligible self-employed individuals.

• Not-for-profits, including churches.

• Accommodation and food services operations (those with North American Industry Classification System (NAICS) codes starting with 72) with fewer than 300 employees per physical location.

The bill allows borrowers that returned all or part of a previous PPP loan to reapply for the maximum amount available to them.

For eligible new borrowers, the covered period will be a choice of any stretch of time beginning on the date of disbursement and ending between 8 and 24 weeks later. Like the first round of loans, proceeds can be used on payroll costs, rent, utilities, mortgage principal interest, and the four new eligible buckets of expenses discussed above. As we’ll discuss more fully below, because PPP borrowers may now also claim the Employee Retention Credit, any wages for which a credit is computed will not be treated as forgivable payroll costs for purposes of the PPP.

Once again, the amount of forgiveness attributable to non-payroll costs cannot exceed 40% of the total amount forgiven. Under the bill, however, the final forgiveness amount will no longer be reduced by any EIDL grant received.

Additional SBA Debt programs

Grants for Shuttered Venue Operators

The bill authorizes $15 billion for the SBA to make grants to eligible live venue operators or promoters, theatrical producers, live performing arts organization operators, museum operators, motion picture theatre operators, or talent representatives who demonstrate a 25% reduction in revenues quarter-over-quarter comparing 2020 to 2019. The taxpayer had to be fully operational as of February 29, 2020.

The SBA will make an initial grant of 45% of gross revenue earned in 2019, up to $10 million. A second grant of up to 50% of the first grant can also be made, but the total of both grants cannot exceed $10 million.

The grants must be used to pay the following expenses:

·       Payroll costs,

·       Rent, utilities or mortgage interest and principal,  

·       Interest on other debt outstanding prior to February 15, 2020,

·       Covered worker protection expenses (as defined above in the PPP section),

·       Up to $100,000 in payments to an independent contractor,

·       Other ordinary and necessary expenses including maintenance, administrative costs, state and local taxes, insurance premiums, advertising, and more. The grant CANNOT be used to purchase real estate, pay interest or principal on debts taken out after February 15, 2020, or lobbying expenses.

Pursuant to the bill, the grants will not be included in taxable income.

Other Debt Relief Programs

The CARES Act authorized the SBA to pay six months’ worth of a borrower’s principal and interest on an existing Section 7 loan (not a PPP loan). The bill would compel the SBA to pay an additional three months of principal and interest beginning in February 2021.

Employee Payroll Tax Deferral

Over the summer, President Trump used an executive order to allow certain employees to defer the 6.2% share of Social Security tax on wages paid from September 1, 2020 through the end of the year until the first four months of 2021. The bill extends the due date for that deferral to be repaid from April 30, 2021 until December 31, 2021.

FFCRA Credits

The Families First Coronavirus Response Act required certain small employers to pay up to 10 weeks of qualified family leave when an adult couldn’t work because a child was without school or care, and up to 2 weeks of sick leave for a variety of Covid-related reasons. In turn, the employer would receive a fully refundable dollar-for-dollar payroll tax credit equal to the wages paid.

The bill extends the credit provisions from December 31, 2020 through March 31, 2021.

Unemployment Insurance

The bill provides an additional $300 per week for all workers receiving unemployment benefits, through March 14, 2021.

Extension of the Employee Retention Tax Credit

The CARES Act gave rise to the Employee Retention Credit (ERC), a mutually exclusive option to a PPP loan. The credit was only available for 2020, and offset a taxpayer’s payroll tax liability. The credit was equal to 50% of the first $10,000 of qualified wages paid to an employee during an “eligible quarter;” generally, either a quarter in which 1) the business had its operations fully or partially suspended by an appropriate government order, or 2) the business had a precipitous drop in gross receipts quarter-over-quarter when comparing 2020 to 2019. The credit was computed differently if the business had more than 100 employees – above that threshold, the employer could only claim the credit on wages paid to employees NOT to work.

The bill extends the ERC through July 1, 2021, and greatly expends several aspects of the credit for amounts paid in the first two quarters of 2021. First, the credit percentage is increased from 50% to 70% of qualified wages. Qualified wages, in turn, are increased from $10,000 in TOTAL per employee to $10,000 per quarter per employee, while the change in treatment of qualified wages that once occurred above 100 employees now does not kick in until employees exceed 500. In addition, a mere 20% drop in quarter-over-quarter receipts are now required to make a quarter an “eligible quarter,” rather than the 50% initially required by the CARES Act.

Perhaps most importantly, it appears that a taxpayer may now claim the ERC AND take out a PPP loan; they are no longer mutually exclusive. Any wages upon which an ERC is computed, however, would not be forgivable costs under the PPP program.

Full Business Meals Deduction Permitted in 2021 and 2022

 Section 274(n)(2) has been modified to allow for full expensing of “restaurant” meals (rather than the current 50%) purchased in 2021 and 2022 provided the other requirements for deductibility under Reg. Section 1.274-12 are met; i.e., not lavish, the taxpayer is present, as is an employee or business associate, etc.

Changes to Charitable Contributions

The CARES Act permitted taxpayer who do NOT itemize their deductions to claim up to a $300 charitable deduction in arriving at adjusted gross income for 2020 only, provided the contribution were paid in cash to a public charity. The bill extends the provision to 2021, but increases the deduction to $600 for a married couple filing jointly.

The CARES Act also temporarily increased the limitation for deductible cash contributions to a public charity from 60% to 100%. The bill extends this treatment into 2021.

There’s a lot to digest with this bill (which exceeds 5,500 pages in length) and there’s likely to be more information in the future regarding the expanded Employee Retention Credit and the second round of PPP loans.

Consider reevaluating your tax plans based on the outcome of the presidential election

Now that Joe Biden has been projected as the winner of the presidential election by major news outlets,* you may wonder if your federal taxes will be affected.

President-elect Biden campaigned on a broad agenda, including a pledge to roll back many of President Trump’s tax policies. In response to the Tax Cuts and Jobs Act (TCJA), Biden has promised a progressive approach to taxation, focused primarily on increasing the burden on businesses and high-income individuals.

Of course, his odds of translating his proposals into legislation largely hinges on the outcomes of runoff elections for the two Georgia seats in the U.S. Senate. Biden’s party needs to win both seats to take a majority in the Senate. But the elections aren’t scheduled until January 5, 2021 — too late to implement many traditional strategies to reduce 2020 taxes.

Here are some of the most significant proposals that could affect individuals and business’ tax liability if enacted.

Proposals for individual taxes

Biden’s tax policy includes numerous changes that could make changes to the tax bills of individual taxpayers, particularly those with higher incomes, including the following:

Tax rates. Unlike some of his competitors in the Democratic primary, Biden hasn’t pushed for a wealth tax. He would, however, return the top individual tax rate to 39.6%, the pre-TCJA rate, from 37%. The current rates for all other tax brackets would remain in place.

Social Security taxes. Biden has proposed new payroll taxes on those earning $400,000 or more. Currently, employers and employees pay a combined 12.4% on the first $137,700 (adjusted for inflation) of an employee’s earnings for Social Security tax.

Biden’s approach would create a “donut hole” where income from $137,700 to $400,000 wouldn’t be subject to the tax. The hole would slowly close over time as the lower threshold creeps up closer to the static upper threshold due to inflation.

Capital gains taxes. Taxpayers earning more than $1 million would face higher capital gains taxes. Gains would be taxed at their ordinary income rate, 39.6% — or, effectively, 43.4% when combined with the 3.8% rate for net investment income tax (NIIT). That’s almost twice the current rate of 23.8% (20% capital gains rate plus 3.8% NIIT rate).

Child tax credit. Biden would expand the child tax credit. Currently, the credit is $2,000 for each qualifying child under age 17, with up to $1,400 of it refundable. (A refundable tax credit means you get a refund, even if the credit is more than what you owe.) The child tax credit begins to phase out at $200,000 of modified adjusted gross income for single taxpayers and $400,000 for married couples filing jointly.

Biden would increase the credit at $3,000 per child for children ages 6 to 17 and $3,600 for children under age 6. He also would make it fully refundable. Unlike most of Biden’s tax proposals, this change may have bipartisan support in Congress.

Credits for caregiving. Biden would establish a new tax credit up of to $5,000 for “informal caregivers” of aging family members. In addition, he would expand the child and dependent care credit from a maximum of $3,000 for one qualifying individual or $6,000 per family, to a maximum of $8,000 for one or $16,000 per family. Fifty percent of the credit would be refundable.

Housing tax credits. New refundable housing credits would be available, as well. Biden seeks a credit of up to $15,000 for eligible first-time homebuyers — which would be collected at the time of purchase, rather than requiring taxpayers to wait until they file their tax returns. He also proposes a credit for low-income renters that would keep rent and utility payments to 30% of monthly income.

Limits on itemized deductions. Biden proposes to limit the tax benefit from itemized deductions to 28% for taxpayers whose income exceeds $400,000. In other words, each dollar of allowable itemized deductions could reduce income tax liability by no more than $0.28.

Biden also would restore the “Pease limitation” that the TCJA repealed through 2025. The limitation reduces itemized deductions by 3% for every dollar that a taxpayer’s adjusted gross income (AGI) exceeds a specified income threshold. Biden would adopt a threshold of $400,000.

It’s not all bad news when it comes to itemized deductions. Biden proposes eliminating the TCJA’s $10,000 limit on itemized deductions for state and local taxes, which particularly hurts taxpayers in high-tax states such as California, Illinois and New York.

Retirement saving incentives. Biden favors a refundable tax credit (rather than a deduction) for each dollar contributed to certain retirement accounts, such as 401(k) plans and IRAs. Policy analysts have predicted a credit of around 26%. This reduces the savings benefit for higher-income taxpayers, who now can claim deductions that reduce their AGI for their contributions.

Proposals for business taxes

Businesses have voiced concerns about several aspects of a Biden tax plan, including:

Corporate taxes. Biden’s intention to raise the corporate tax rate probably has garnered the most attention on the business side of the equation. The TCJA reduced the rate from 35% under the Obama administration to 21%. Biden would land on the middle ground, raising it to 28%.

Biden also would impose a 15% alternative minimum tax on reported book income (versus the income reported on corporate tax returns), for corporations with at least $100 million in annual income

Qualified business income (QBI) deduction. Through 2025, taxpayers generally can deduct up to 20% of their QBI from a pass-through entity (sole proprietorship, LLC, partnership or S corporation). Phaseouts begin at higher income thresholds — for 2020, they kick in when taxable income exceeds $163,300 for single taxpayers or $326,600 for married couples) — and other limitations also apply. The QBI deduction reduces the effective top rate for these taxpayers from 37% to 29.6%.

Biden would simplify the deduction by not allowing it for individuals earning more than $400,000. Those taxpayers could see a 10% jump in their tax rate, from 29.6% to the 39.6% top tax rate. He also would eliminate the deduction for rental real estate activities.

Proposals for estate taxes

The TCJA slashed estate taxes, cutting the top rate from 55% to 40% and temporarily doubling the federal gift and estate tax exemption to $10 million (adjusted annually for inflation), through 2025. The 2020 exemption is $11.58 million for individuals and $23.16 million for married couples; for 2021, it’s $11.7 million and $23.4 million, respectively.

Biden has indicated he would like to roll back the exemption to $3.5 million for estate taxes. He would exempt $1 million for the gift tax and impose a top estate tax rate of 45%.

Biden also aims to end the so-called step-up in basis that spares beneficiaries substantial tax liability for capital gains on inherited assets that have appreciated in value, such as stock or a house. Specifically, if a beneficiary sells an inherited asset now, the capital gains tax is based on the asset’s fair market value at the time of the inheritance, rather than the date of the original purchase.

Next steps

Higher-income taxpayers may want to take steps before year end to mitigate the risk that the Georgia run-offs result in a Democrat majority in the Senate and, eventually, hikes in income tax rates. Some strategies higher-income taxpayer may consider if they fear higher rates next year include selling stock this year or accelerating income into 2020 and deferring deductible expenses into 2021.

Conversely, middle-income taxpayers who could benefit from Biden’s proposals may want to consider deferring income and accelerating expenses into 2020. Whether their tax rates drop or remain the same, these measures generally are advantageous.

Roth IRA conversions are another approach that can pay off should tax rates go up in the future. When a traditional IRA is converted, the taxpayer must pay income tax on the fair market value of its assets on the date of transfer. Income tax rates may not be lower than they are now for at least the next four years.

On the estate planning front, this is a good time for high-net-worth individuals to consider intra-family loans, especially in light of the historically low interest rates. The loans don’t affect one’s gift and estate tax exemption and can subsequently be converted to a gift if advisable in a new tax environment. The value of the note on the loan will be frozen in the lender’s estate, and the loan proceeds can grow outside of the estate.

Wealthy individuals also should look into vehicles such as grantor retained annuity trusts and charitable lead annuity trusts. Making trust transfers now, while current exemptions are in effect, can lock in the benefits of those higher exemptions (assuming exemption adjustments aren’t retroactive).

Stay tuned

With the federal budget deficit now over $3 trillion and the need for additional stimulus spending due to the COVID-19 pandemic, new tax laws could face an uphill battle, regardless of Senate control. We’ll keep you up-to-date on the developments that could affect your personal and professional bottom lines.

*The Electoral College will certify the election results by December 14. There also are some ongoing state recounts and legal challenges.

© 2020

IRS Guidance Provides RMD Rollover Relief

The CARES Act was enacted in an attempt to mitigate the economic effects of the COVID-19 pandemic. Among other things, it extends favorable tax treatment to qualified individuals who take so-called “coronavirus-related distributions” (CRDs) from IRAs, 401(k) plans and certain other retirement plans.

Specifically, the CARES Act waives the 10% early distribution penalty for CRDs taken between January 1, 2020, and December 31, 2020. Under the law, the waiver applies to CRDs made to an individual:

• Who’s diagnosed with COVID-19,

• Whose spouse or dependent is diagnosed with COVID-19, or

• Who experiences adverse financial consequences as a result of COVID-19. These include being quarantined, furloughed or laid off; having work hours reduced; being unable to work due to lack of child care; closing (or reducing the hours of) a business owned by the individual; or other factors determined by the Treasury Secretary.

IRS Notice 2020-50 expands the definition of qualified individuals for purposes of CRDs and plan loans to take into account additional factors, such as a reduction in pay or self-employment income, the rescission of a job offer and the delay of a start date for a job. In addition, the definition now also considers adverse financial consequences arising for the impact of COVID-19 suffered by an individual’s spouse or household member.

Eligible individuals can withdraw up to $100,000. They can repay withdrawn funds within three years of the day after the CRD without regard to the applicable cap on annual contributions. To the extent such early distributions aren’t repaid within three years or eligible for tax-free rollover treatment, the related income tax can be prorated over three years.

The CARES Act also allows plans to implement certain relaxed rules for qualified individuals on plan loan amounts and repayment terms. For example, plans can suspend loan repayments due from March 27, 2020, through December 31, 2020 (delaying each payment up to one year), and the limit on loans made on or after March 27, 2020, and before September 23, 2020, is increased from $50,000 to $100,000. The limit on the aggregate amount of loans in that period is increased from 50% of the employee’s vested accrued benefit to 100%.

Notice 2020-50 makes clear, too, that the $100,000 limit on CRDs applies to a qualified individual’s aggregate CRDs from all eligible retirement plans — the limit doesn’t apply on a per-plan basis. It explains that CRDs can be used for purposes not related to COVID-19 and that repayments to an IRA don’t count against the one-rollover-per-12 months limit on IRA rollovers. And it warns that qualified individuals who elect to include the entire amount of a CRD in their 2020 income, rather than prorating it over three years, will be held to that choice after they file their 2020 income tax returns; they can’t subsequently revoke the election.

As for loans, the notice provides a safe harbor to help employers avoid complicated calculations related to the stacking of individually reamortized payments on top of regularly scheduled payments due after December 31, 2020. The safe harbor permits reamortized payments to begin after the period of payment suspension and continue for up to one year after the loan was originally scheduled to be repaid. The guidance notes, though, that other reasonable methods of administering the loan relief exist.

Notice 2020-50 further clarifies that it’s up to employers to decide whether — and to what extent — their plans will provide the CRD and loan relief allowed by the CARES Act. (Qualified individuals can claim the tax benefits even if plan provisions aren’t changed.) We can help you determine which aspects of the relief to offer and how best to implement them.

Rollover of RMDs

The CARES Act waives the RMD rules for certain defined contribution plans and IRAs for calendar year 2020. The waiver applies to both 2019 RMDs required to be taken by April 1, 2020, and RMDs required for 2020. It applies for calendar years beginning after December 31, 2019.

But, because the law wasn’t enacted until late March 2020, some individuals had already taken RMDs for the year. If they wanted to roll over those now non-RMD distributions to an eligible retirement account, they needed to satisfy the rule that generally requires tax-free rollovers to be made within 60 days of distribution. Moreover, IRAs generally are subject to a “one-rollover-per-12 month” restriction.

The IRS previously extended the 60-day rollover period to the later of 60 days after receipt or July 15, 2020, for 2020 RMDs taken as early as February 1, 2020, but that left out individuals who took their 2020 RMDs in January. Notice 2020-51 extends that period to the later of 60 days after receipt or August 31, 2020, for all distributions that, but for the CARES Act, would have been RMDs (even if the distribution normally would be treated as part of a series of substantially equal periodic payments).

Notice 2020-51 also permits an IRA owner or beneficiary who has already received a distribution that would’ve been an RMD for 2020 to repay it to the IRA by the later of 60 days after receipt or August 31, 2020 (non-spouse beneficiaries generally are prohibited from doing rollovers of distributions). The repayment is exempt from the one-rollover-per-12 month limit on IRAs.

The notice includes a sample plan amendment employers can adopt to give plan participants and beneficiaries whose RMDs are waived the option to receive the waived RMD. The sample will have no effect on other distribution provisions.

Stay tuned

As the number the COVID-19 cases continues to spike across the country, it’s possible that Congress, the Department of Treasury and the IRS may provide additional tax and financial relief. We’ll let you know about the latest developments that could affect your finances.

Paycheck Protection Program Flexibility Act - Eases PPP Loan Forgiveness Restrictions

The U.S. Senate has passed the bipartisan Paycheck Protection Program Flexibility Act of 2020, which loosens several of the Paycheck Protection Program’s (PPP’s) more onerous restrictions regarding loan forgiveness. President Trump has signed the bill into law.

The new law follows the May 22, 2020, release of an interim final rule from the U.S. Department of Treasury and the Small Business Administration (SBA) on PPP loan forgiveness requirements. Among other areas, that guidance addresses the calculation of full-time employees and total salary or wages for purposes of loan forgiveness reductions.

The PPP in a nutshell

The Coronavirus Aid, Relief and Economic Security Act (CARES Act) established the PPP to help employers cover payroll during the ongoing COVID-19 pandemic. The program is open to U.S. businesses with fewer than 500 employees — including sole proprietors, self-employed individuals, independent contractors and nonprofits — affected by COVID-19. The loans may be used to cover payroll, certain employee health care benefits, mortgage interest, rent, utilities and interest on any other existing debt for the “covered period.”

Under the CARES Act and subsequent guidance, the covered period ran for eight weeks after loan origination. The PPP Flexibility Act extends that period to the earlier of 24 weeks after the origination date or December 31, 2020.

PPP loan proceeds applied to cover payroll, mortgage interest, rent and utilities are subject to 100% forgiveness if certain criteria are met. Earlier Treasury Department regulations indicated that eligible nonpayroll costs couldn’t exceed 25% of the total forgiveness amount, but the PPP Flexibility Act raises the threshold to 40%.

At least 60% of the loan must be spent on payroll costs to qualify for any forgiveness. For unforgiven costs, the new law extends the repayment period from two years to five years. However, employers are still required to maintain their staff headcount and payroll to qualify for full forgiveness.

Loan forgiveness may be reduced if:

• The average weekly number of full-time equivalent (FTE) employees is reduced, or

• Salaries and wages are cut by more than 25% for any employee who made less than $100,000 annualized in 2019.

Borrowers originally had until June 30, 2020, to restore full-time employment and salary levels from reductions made between February 15, 2020, and April 26, 2020, and avoid reductions in the forgiveness amount. The PPP Flexibility Act extends that deadline to December 31, 2020.

The covered period

Although the CARES Act provides that the covered period runs for eight weeks from the date of origination, the May 22 guidance lays out an alternative covered period. Borrowers with a biweekly, or more frequent, payroll schedule can elect to base their calculations on the eight-week period beginning on the first day of their first pay period following the disbursement date.

Note that the alternative covered period is available only for calculating payroll costs; it doesn’t apply to calculating mortgage interest, rent or utilities. And, if a borrower does use the alternative period to compute payroll costs, it also must use that alternative period to calculate FTE employees and salary or wage reductions.

Eligible amounts

The May 22 guidance clarifies that payroll costs paid or incurred during the covered period are eligible for forgiveness. Nonpayroll costs are eligible for forgiveness if paid during the covered period or incurred during that period and paid on or before the next regular billing date, even if the billing date is after the covered period.

According to the guidance, payroll costs include bonuses and hazard pay, as well as salary, wages and commission payments to furloughed employees (as long as they don’t exceed an annual salary of $100,000, as prorated for the covered period). They’re considered paid on the day paychecks are distributed.

Payroll costs are deemed to be incurred on the day the employee’s pay is earned. Payroll costs incurred but not paid during the borrower’s last pay period in the covered period are eligible for forgiveness if paid on or before the next regular payroll date. An eligible nonpayroll cost must be paid during the covered period or incurred during the period and paid on or before the next regular billing date, even if the billing date is after the covered period.

The guidance makes clear that costs related to personal property (for example, office equipment) are eligible nonpayroll costs. Mortgage interest payments for real or personal property are included, as well as rent or lease payments for real or personal property. Advance payments on mortgage interest, however, aren’t eligible for forgiveness. Utility payments include payments for electricity, gas, water, transportation, telephone or internet access.

The FTE reduction

The May 22 guidance spells out that when determining whether an adjustment in the forgiveness amount is necessary due to an FTE reduction, the number of FTE employees is calculated using a 40-hour workweek. For each employee, the average number of hours paid (not worked) per week is divided by 40. The maximum for each employee is capped at 1.0 FTE employee.

For employees who were paid for less than 40 hours per week, borrowers can calculate the average number of hours the employee was paid per week during the covered period. The guidance also provides a simplified method, under which employees who work 40 hours or more per week are assigned a 1.0, and those who work less are assigned a 0.5. Borrowers must select one of these two approaches and apply it consistently to all part-time employees.

The amount of loan forgiveness may be reduced if the average weekly FTE during the covered period is less than its average FTE in 1) the period of February 15, 2019, through June 30, 2019, 2) the period of January 1, 2020, through February 29, 2020, or 3) in the case of seasonal employers, either of the preceding periods or a consecutive 12-week period between May 1, 2019, and September 15, 2019. The borrower can elect which period to use as its reference period. The good news is that the comparison isn’t made against the last full quarter worked, as some borrowers feared.

The May 22 guidance also includes exceptions for employees who:

• Reject a good faith offer to return at the previous pay and hours (borrowers must maintain documentation of the offer and rejection and notify the state unemployment office of an employee’s rejected offer within 30 days of the rejection), and

• During the covered period, were fired for cause, voluntarily resigned or voluntarily requested and received a reduction in hours.

Any FTE reductions due to these reasons won’t reduce the forgiveness amount.

The PPP Flexibility Act adds a new exemption based on employee availability. For the period from February 15, 2020, through December 31, 2020, the amount of loan forgiveness won’t be reduced due to a reduction in the number of FTE employees if a borrower 1) is unable to rehire an individual who was an employee on or before February 15, 2020, or 2) can demonstrate an inability to hire similarly qualified employees on or before December 31, 2020.

The exemption also applies if the employer is unable to return to the same level of business activity it was operating at before February 15, 2020, due to governmental requirements or guidance issued from March 1, 2020, through December 31,2020, related to COVID-19 safety standards.

The salary/wage reduction

The CARES Act indicates that the forgiven loan amount may be reduced if the total salary or wages of any applicable employee is reduced more than 25% of the “total salary or wages” in the “the most recent full quarter during which the employee was employed before the covered period.” With the covered period running only eight weeks, borrowers fretted that the total wages in the covered period would almost certainly fall more than 25% compared to a full quarter.

The PPP Flexibility Act doesn’t address this concern, but the SBA’s loan forgiveness application does. In making the determination of whether salary or wages were reduced 25%, it compares “average annual salary or hourly wage” for the relevant periods — not total wages.

In addition, to ensure that borrowers aren’t doubly penalized, the May 22 guidance directs that the salary/wage reduction applies only to the portion of the decline in employee salary and wages that isn’t attributable to the FTE reduction.

Delayed payment of payroll taxes

The PPP Flexibility Act also takes steps to ensure borrowers have full access to the CARES Act’s payroll tax deferment, which is intended to provide businesses with adequate capital to withstand the COVID-19 pandemic. The new law provides that the delayed payment of employer payroll taxes on top of the receipt of a PPP loan doesn’t constitute impermissible double dipping.

Fast and furious

The rules for the PPP — whether in legislative, regulatory or other forms — continue to emerge at a brisk pace, often updating previous guidance. We can help ensure you’re satisfying all of the requirements to obtain a loan and secure full forgiveness.

© 2020

The Small Business Administration launches the Paycheck Protection Program

The application process for eligible small businesses and sole proprietors began April 3, 2020, and independent contractors and self-employed individuals can begin to apply on April 10, 2020. Businesses might be able to expedite the process by seeking loans from financial institutions where they have existing lending relationships. 

Act now!

Businesses can submit a request for forgiveness to their lenders. Requests must include documents verifying the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease and utility obligations. Lenders must make forgiveness decisions within 60 days.

Borrowers also must maintain staff and payroll to qualify for full forgiveness. Loan forgiveness will be reduced if salaries and wages are reduced by more than 25% for any employee who made less than $100,000 annualized in 2019. Businesses will have until June 30, 2020, to restore full-time employment and salary levels from reductions made between February 15, 2020, and April 26, 2020.

Businesses can qualify for loan forgiveness for amounts used for payroll costs, mortgage interest, and rent and utility payments over the eight weeks after receiving the loan. While the CARES Act provides that a borrower can spend up to 50% of loan proceeds on nonpayroll costs and still qualify for forgiveness, the final regulations indicate that no more than 25% of the loan proceeds can be used for such costs and benefit from forgiveness.

Loan forgiveness

The loans carry a fixed interest rate of only 1% and, although the CARES Act provided for terms of up to 10 years, will run for two years. All payments are deferred for six months, but interest will continue to accrue. Borrowers can pre-pay without penalties or fees.

Payroll excludes payroll and income taxes and compensation paid to employees who don’t live in the United States. It also doesn’t include qualified sick or family leave wages paid under the recent Families First Coronavirus Response Act.

Payroll costs include compensation, cash tips, severance, employee benefits (including leave), and state and local taxes on compensation. For sole proprietors, independent contractors and self-employed individuals, payroll includes wages, commissions, income and net earnings from self-employment.

Loans are subject to a $10 million cap. Payroll costs are limited to $100,000 annualized for each employee; amounts above that must be excluded from the calculation. Independent contractors who have the ability to apply for a PPP loan on their own don’t count for purposes of a borrower’s payroll.

Eligible businesses can obtain loans for 2 1/2 months of their average monthly payroll costs plus the outstanding amount of an Economic Injury Disaster Loan (EIDL) made between January 31, 2020, and April 3, 2020 (less the amount of any advance under an EIDL COVID-19 loan, which doesn’t have to be repaid). Seasonal or new businesses will use different applicable time periods for the calculation.

Loan amounts and terms

Note that, in the days leading up to the opening of the application process, some banks expressed concern that a lack of guidance could result in significant delays in issuing loans. The Treasury Department didn’t release its interim final rule until the evening before the program began accepting applications, so lags in funding may occur.

Independent contractors, sole proprietors and self-employed individuals must provide additional documentation, such as payroll processor records, payroll tax filings, Form 1099s and, for sole proprietors, income and expenses.

• They were operating on February 15, 2020, and had employees for whom they paid salaries and payroll taxes or paid independent contractors, as reported on Form 1099-MISC,

• Current economic uncertainty makes the loan necessary to continue ongoing operations,

• The funds will be used to retain workers and maintain payroll, or to make mortgage interest, rent and utility payments for eight weeks (75% of loan proceeds must be used for payroll costs),

• They don’t have, and won’t receive, another loan under the PPP, and

• The number of full-time equivalent employees on payroll and the dollar amounts of payroll costs, covered mortgage interest payments and covered rent payments and utilities.

Instead, borrowers must certify in good faith all of the following:

The SBA is waiving its usual requirements for loans. Businesses need not provide personal guarantees or collateral — or demonstrate the inability to obtain some or all of the loan funds from other sources (also known as the Credit Elsewhere requirement).

Loan requirements

For businesses in the accommodation and food services sector, the 500-employee threshold is applied on a per physical location basis. The SBA’s normal affiliation rules also don’t apply to companies that receive financial assistance from an SBA-licensed Small Business Investment Company or certain franchises.

The PPP generally is available to small organizations with fewer than 500 employees. The term “employees” includes full-time, part-time and any other status workers.

Eligible borrowers

The program is open to virtually every U.S. small business — including sole proprietors, self-employed individuals, independent contractors and nonprofits — affected by COVID-19. It’s available through June 30, 2020, but on a “first-come, first-served” basis. The U.S. Treasury Department is urging businesses to apply promptly.

The Coronavirus Aid, Relief and Economic Security Act (CARES Act) allocates nearly $350 billion to a new lending program through the Small Business Administration (SBA), aimed at helping employers cover their payrolls during the coronavirus (COVID-19) pandemic. The loans under the Paycheck Protection Program (PPP) are subject to 100% forgiveness if certain criteria are satisfied, and neither the government nor lenders will impose fees.